Working capital optimization

(1)

Working capital optimization

Simon Rockcliffe

Ernst & Young

(2)

Background

Methodology and approach

Canadian

Financial

Executives

Methodology:

► FEI Executive

Survey

(November

2012)

Outcome:

► Shared

experiences

Executives

Research

Foundation

(CFERF)

2012)

► CFERF

Executive

Research

Forum

experiences

► Lessons

learned

(3)

Background

Survey focus

Working capital optimization

Performance

trend

Degree of

importance

Competing

priorities

Looking back

Current state

Looking forward

Challenges

faced over last

12 months

Planned

improvements /

focus

Governance

(4)

Background

Participant demographics

36%

9%

17%

55%

2%

35%

4%

Annual revenue

Position

Corporate structure

CFO 56%

VP Finance 17%

Controller 9%

Treasurer 6%

Owner 3%

Less than $50m

$0-99m

$100-499m

$500-999m

$1 billion or more

11%

27%

Private

Public (incl. Sub of public)

Government Agency

Not for profit

Other

Owner 3%

Other 9%

(5)

Background

Working capital defined

► Working capital considers the net

liquid assets a company has to

meet its short term needs

► Focus = operational

improvement for processes

underlying the three largest areas

AR (DSO) AP (DPO)

Cash

conversion

underlying the three largest areas

of working capital (receivables,

payables, Inventory)

► Increasing or decreasing the

velocity of the process cycles

impacts the speed with which

cash is converted

NWC (DWC) Inv. (DIO) AP (DPO) AR (DSO) Inv (DIO) NWC (DWC)

As Is

_Aspiration

To Be

Current state

(6)

Looking back

Recent performance trends

FEI Research

Canada Top 400

31.4

29.6

28.5

28.4

26.2

24.5

23.3

23.2

19.5

21.1

20

25

30

35

All Industries excl. O&G and MIN Total 54% companies worse

Improve

39%

Deteriorate

24%

Days

How has working capital performance

changed over the last 12 months?

15 2007

2008

2009

2010

2011

-43.8

39.8

32.5

28.5

28.4

29.6

31.4

31.3

42.1 -42.0

42.1 -43.9

26.2

31.4

39.8 -44.6

30.6 DIO

-42.8

DPO

DSO

40.2

worse

Similar

37%

Source: Publically available financial statements; EY analysis

How would you compare performance

against industry peers?

24%

Better

Same

Worse

17%

55%

Do not know = 4%

(7)

Looking back

Does size matter?

Small

Factors to consider:

► Contractual demands

► Pricing

Large

► Degree of control

► Defined processes

= Reduced ability to impact

working capital performance

(8)

Looking back

Internal and external factors

► Economy

► Cost of capital

► Regulation

Working capital performance

External

_Internal

► Regulation

► Competitor strategies

► Customer behaviour

► Supplier behaviour

► Resource availability

Tactical Mgmt

►Standard policy

►Reporting/visibility

►Incentivization

►Trade-offs

Strategic Decisions

►Sales locations

►Sourcing locations

►Outsourcing

►Product breadth

(9)

Looking back

Key challenges over the last 12 months

No impact

Payment slowdown

Low

High

Customer term pressure

19%

Demand forecasting

accuracy

12%

31%

17%

35%

Medium

28%

15%

26%

19%

29%

34%

35%

15%

SLOB inventory

6%

36%

35%

17%

22%

37%

33%

32%

Supplier cost pressure

Supplier term pressure

Resource availability

13%

26%

14%

15%

46%

40%

12%

(10)

Looking back

Initiated an improvement program

28%

40%

52%

Fund M&A

Meet FCF Targets

Debt repayment

Main drivers for increasing focus on working capital?

Yes

48%

Yes

69%

Undertaken improvement program

in last 12 months?

10%

25%

26%

28%

Return Cash to

stakeholders

Reduce gap to peers

Stakeholder pressure

Fund M&A

No

52%

No

31%

Program?

Success?

(11)

Current state

Importance of working capital

23%

28%

4%

15%

Rate level of importance placed on

working capital in organization?

► Leaders set the tone

► Importance varies across the

organization

► High = more proactive

Somewhat high

High

Low

Very high

30%

28%

► High = more proactive

► Public companies > Private

companies

(12)

Current state

Governance

57%

How frequently do you monitor

working capital performance?

Organizational structure for managing

working capital?

12%

17%

34%

Decentral

17%

Partial

Central

18%

12%

5%

14%

13%

9%

Daily

Weekly Monthly

Quarterly Never

48%

AR

Central

Supply

chain

AP

71%

(13)

Current state

Governance

Yes

31%

Is working capital or Free Cash Flow

performance embedded in variable

compensation?

► 25% average of variable

compensation

► Increasingly common

Aligns reward and behaviours

31%

No

69%

► Aligns reward and behaviours

► Ensure metric in line with

(14)

Looking forward

Competing priorities

54%

75%

80%

Operational efficiencies/

Cost reduction

Profitability

M&A

What areas do you anticipate will require management attention in the next 12 months?

25%

32%

42%

50%

Increasing product

offering

Outsourcing

processes

Implementating

new system

Overseas expansion

(15)

Looking forward

Misconceptions

Misconception

Reality

Limited return on investment

Rapid cash inflow (10-20% each

area)

Will be detrimental to relationships

with customers and suppliers

Improved service levels; customer

service increased; increased

with customers and suppliers

service increased; increased

collaboration

Primarily focused on extending

payments

Leading practice policy to increase

standardization and improve

visibility

Finance responsibility

(16)

Panel introduction

Experienced panel for today’s discussion:

► Danielle Parent – VP Finance, Fujitsu Canada

► Derek Petridis – VP Finance, Shikatani Lacroix Design

► Nancy Lala – CFO, About Communications

(17)

Polling

► Six questions

► Voting device at your tables

► First valid entry will be accepted

► Results are anonymous

► Start with a test question

(18)

(19)

Looking forward

Lessons learned

► No silver bullet

► Requires a tailored approach – influencability

► Measure if you want to improve

A company-wide challenge

► A company-wide challenge

(20)